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Oil Search in $1.16b equity raising as oil rout bites

Oil Search could consider selling part of its "crown jewel" asset, its stake in the PNG LNG venture, chief executive Keiran Wulff has revealed, if a $US700 million ($1.16 billion) share sale proves not to be enough for the oil and gas producer to ride out a protracted price slump.

Dr Wulff, who only took up the role in February when predecessor Peter Botten retired, said a sell-down of Oil Search's 29 per cent stake was an option considered in the last few weeks before the decision to raise equity instead.

But while a sell-down of the high-quality asset was not feasible now because of time pressures, it is still a possible way forward in the future if needed, he signalled, amid fears that the global crash in oil prices has further to run, putting renewed pressure on the debt-laden balance sheet.

"There are some parties that have expressed interest in the asset that would require a longer-term review, and we always are open to divesting part of assets at the right price," Dr Wulff said on a conference call for the raising, which will see shares sold at $2.10 apiece, compared with Friday's close of $2.73. Shares in Oil Search, halted on Monday for the raising, will resume trading on Wednesday.

The raising will include a $760 million underwritten placement of shares to institutional shareholders and a non-renounceable entitlement offer of up to $400 million, where one new share can be bought for every eight held by both institutional and retail investors. The retail part is not underwritten.

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In a concern for some investors, Oil Search's cornerstone shareholder, Abu Dhabi's Mubadala Investment Co, won't take up new shares, as flagged earlier by The Australian Financial Review's Street Talk column. While Dr Wulff said Mubadala "has confirmed that Oil Search remains an important investment", its 12.9 per cent stake will now be significantly diluted with the offer of 552 million new shares, equivalent to about 36 per cent of existing stock.

Longstanding shareholder Allan Gray will participate, but portfolio manager Simon Mawhinney voiced some frustration that Oil Search had not been more cautious in debt funding taken on for acquisitions in Alaska.

"It's not unreasonable to expect companies to manage their finances in a way that is conservative," said Mr Mawhinney, who regards the raising as bigger than it needs to be, assuming current "unsustainably low" oil prices cannot persist beyond a few months.

Still, he said Allan Gray would take up its rights and also participate in the placement, noting that Oil Search's enterprise value is currently lower than its $9.2 billion share of construction costs of PNG, one of the best LNG projects in the world.

"So you get that project for less than the cost of developing it and you get a lot of other stuff for free," he said. "When you are objective about the whole thing, Oil Search does look incredibly cheap today."

Bernstein Research recommended clients take up their rights, also highlighting the potential for takeover interest in Oil Search.

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"Oil Search has great assets but not the ability to fund growth," said Bernstein analyst Neil Beveridge. "The retirement of ...Peter Botten will make shareholders more open to M&A," he added pointing to Oil Search's senior partners in PNG, ExxonMobil and Total, as possible bidders, but also suggesting Woodside Petroleum could be tempted given the company is now trading "well below the cost of what many LNG projects can be built for".

The raising comes after Oil Search last month slashed 2020 capex by about 40 per cent and cut jobs, and as it is eyeing bigger cuts next year if prices don't recover. A $US300 million loan maturing in September has been extended to June 2021, subject to the successful completion of the share sale, taking the immediate pressure off.

Oil Search shares have slumped from almost $8 in January as a result of the impact of the COVID-19 pandemic on oil demand, combined with the oil price war between Saudi Arabia and Russia which sent commodity prices plummeting.

Oil Search said that the share sale would reduce gearing to 28 per cent and increase liquidity to $US1.835 billion of cash and undrawn debt. That would see it through until December 31 2021 assuming Brent oil prices remain north of the low $US20s a barrel.

Sustained super-low oil prices will still cause Oil Search problems. The company said that if Brent averages below the low $US20s a barrel for the rest of 2020 it may be in breach of a key financial covenant at December 31. A similar risk arises in June 2021 if Brent averages below the low $US30s.

Dr Wulff said lenders had signalled they were willing to consider covenant waivers.

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